I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Sunday Planning, I plan for the week ahead.
I suppose people might look at the U.S. stock market’s behavior last week and think, “we’ve gotten the all clear!” and breathe a sigh of relief. The S&P 500 was up big on Tuesday, and green on Wednesday and Thursday too, leaving the possibility that in the next four days we’ll see one of William O’Neil’s follow-through days. O’Neil developed this charting analysis to identify an early new bull market.
However, I doubt we have seen the end of the correction in the S&P 500 and other major U.S. market indexes. Oil shocks like we are seeing from the Gulf conflict often cause recessions, which lead to poor stock market returns. While current forward earnings estimates are high and rising, analysts are typically poor at predicting earnings when growth slowdowns arrive.
We’re in a situation where stock market price and volume action is far less important than macroeconomic reality.
We may be looking at a situation that is similar to the 1970s. There were two waves of inflation during that decade. The first occurred after the Yom Kippur War of 1973. Arab members of OPEC enacted an oil embargo against the U.S. and other nations supporting Israel in the conflict. This led to quadrupled oil prices, gasoline shortages, rationing, and global economic disruption. Inflation reached more than 12%.
A second oil crisis happened after the 1979 Iranian Revolution. Oil prices doubled within 12 months. And a new wave of inflation started, this time peaking at almost 15%by early 1980.
Meanwhile, U.S. stocks, and stocks globally, crashed. This was not just due to the oil shock but also the collapse of the Bretton Woods system in which the U.S. dollar served as the world’s reserve currency, backed by gold. Nixon abruptly ended the gold standard. Global stock market indices bottomed out between September and December 1974, losing more than 30% of their value. The Dow Jones Industrial Average lost over 45% of its value. Recovery to the prior peak took more than a decade. The U.S. stock market didn’t return to the 1973 peak until August 1993!
With inflation at times over 10%, by sitting in cash, you would have lost real spending power, but not as much as if you left everything in stocks and bonds.
What did do well in the 1970s? Gold. It rose in price from about $35 an ounce to over $800 by early 1980, an almost 2600% return.
Why am I writing about this, for my Sunday Planning post? Because I’m girding myself to stay in cash, and be very cautious about adding any equity exposure here.
The investments that will likely do well in the coming inflationary, security-oriented era are commodities including precious and base metals, energy stocks, and real estate. These have already seen run-ups as well as initial pullbacks. But I imagine over the coming years the returns in these areas will prove staggering, as they were in the 1970s.